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New Delhi: India's inflation soared to a 16-year high and may accelerate further after the government approved wage increases for civil servants.
Wholesale prices rose 12.44 per cent in the week to August 2, after increasing 12.01 per cent in the previous week, the commerce ministry said in New Delhi. Economists were expecting a 12.2 per cent gain.
Prime Minister Manmohan Singh's cabinet yesterday approved an average 21 per cent salary increase for about five million government employees. That may give the central bank little choice other than to raise interest rates again after three increases since June.
"We expect inflation to remain elevated and reach 13.5 per cent by December," said Indranil Pan, chief econ-omist at Kotak Mahindra Bank in Mumbai. "We are looking at a 50 basis point increase for both the repurchase rate and the cash-reserve ratio by year-end."
Bonds fall
India's 10-year bonds fell for a third day, their worst run in almost a month, on accelerating inflation. The yield on the benchmark 8.24 per cent note due April 2018 climbed 5 basis points to 9.14 per cent as of the 5.30pm close in Mumbai, according to the central bank's trading system.
The Reserve Bank of India last month raised its benchmark rate by a half point to a seven-year high of 9 per cent. The reserve requirement for commercial lenders was also lifted to 9 per cent from 8.75 per cent. Governor YV Reddy is targeting inflation of 7 per cent in the year to March.
Manmohan Singh's economic advisory council on Wednesday said the central bank needs to keep monetary policy "tight" amid rising prices. Faster inflation, coupled with a global slowdown, may weaken growth in India's $912 billion economy to the slowest in four years, the panel said.
Finance Minister P. Chidambaram yesterday said the impact of increased salaries on inflation was taken into account when the cabinet approved the proposal. The higher wages will cost the government Rs338.6 billion ($8 billion) this year.
Inflation in India in the week to August 2 accelerated because of a rise in the cost of pulses, fruits, spices and aviation turbine fuel. Fuel-price inflation rose to 17.99 per cent, compared with 17.12 per cent in the previous week, yesterday's report showed.
Fuel costs increased after Indian Oil, the nation's largest refiner, raised the price of jet fuel by 2.9 per cent on August 1 to 2,043.03 rupees a kilolitre.
Rupee: Currency falls to 43
India's rupee declined by the most in three months on speculation global stock losses will spur investors to pare riskier emerging-market assets.
The rupee fell to the lowest level in almost a month as yesterday's 2.7 per cent jump in crude oil prices renewed speculation refiners such as Indian Oil Corp., the nation's largest, will buy more dollars..
The rupee fell 1 per cent to 43.055 per dollar at the 5pm close, the lowest since July 16, according to data compiled by Bloomberg. It may fall to 43.5 in a month, analysts said.
- Bloomberg
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